NIESR warns on negative shocks following a Brexit

12 May 16

A vote to leave the European Union would result in a “significant shock” to the UK economy, with detrimental effects in both the short and long term, the National Institute of Economic and Social Research has warned.

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NIESR said the negative impacts of Brexit would be likely to manifest in a number of channels, including depreciation of sterling, reductions in trade and foreign investment, and lower real wages.

Overall, NEISR said that, in the short term, Brexit would likely result in 1.2% lower growth in 2017 and between 1.5% and 7.8% lower growth by 2030 compared with a world in which the UK voted to remain.

Its analysis found that, in the short run, heightened levels of uncertainty are likely to persist or intensify, resulting in currency volatility and higher borrowing costs.

In a separate report on the UK economy, NIESR found that uncertainty surrounding the referendum has already weighed on growth, with many of its impacts already visible.

In the event of a vote to leave, the think-tank said sterling could depreciate by around 20% immediately, causing inflation to spike.

As such short term influences dissipate, NIESR said they will be replaced will long-run reductions on trade and foreign direct investment, as well as a potential impact on productivity.

It said these “would represent more permanent structural changes to the UK economy” with “important long-run implications”.

The weaker pound would be likely to lead to higher import prices, which would be then passed on to households.

By 2030, NIESR estimates a fall in consumption of between 2.4% and 9.2% compared with a UK that remained in the EU.

Real wages would bear the brunt of adjustment too, it said. It forecasts them to be between 2.2% and 7% lower in 15 years if the UK leaves.

However, the UK’s flexible labour markets would likely ensure that there would be no perceptible increase in employment by 2030.

NIESR’s analysis considered four scenarios: EEA membership; bilateral trade agreements with the EU; World Trade Organisation membership and no free trade agreement with the EU; and WTO membership, no free trade agreement with the EU, and a -5% productivity shock.

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